THE MEDIA BUSINESS

THE MEDIA BUSINESS; Court Orders F.C.C. to Rethink New Rules on Growth of Media

By STEPHEN LABATON

Published: June 25, 2004

WASHINGTON, June 24—
A federal appeals court on Thursday dealt a setback to the nation's largest media companies by ordering the Federal Communications Commission to reconsider the rules it issued last summer, easing the way for them to grow and enter new markets.

The 2-to-1 decision by a panel of the United States Court of Appeals for the Third Circuit in Philadelphia means that big broadcasting and publishing companies, which have lobbied and litigated for years in an effort to ease the rules, will have to hold off on any attempts to expand.

The decision was also a setback for the Bush administration, which supported easing the ownership limitations, and for Michael K. Powell, the chairman of the commission and the main architect of the new rules.

The appeals court concluded that the commission had failed to adequately justify the rules, which would have lifted a restriction on a company's owning both a newspaper and television or radio station in the same market. In the largest cities, the rules would have allowed companies to own as many as three television stations, eight radio stations and a cable operator, as well as a newspaper. And they allowed the largest television networks to buy more affiliated stations, although Congress rolled back that provision this year.

The appeals court ruling did not dispute that the commission had the right to ease ownership limitations, but said regulators had to do so in a way that was not ''arbitrary and capricious,'' which the court said had occurred in this case.

Proponents of the new rules have argued that the old restrictions are outdated because technological changes, like the advent of the Internet with its many sources of information, have expanded the universe of news and entertainment outlets available to consumers. Thus, they said, increased concentration would not hurt competition.

The court decision was a victory for smaller broadcasters and a coalition of labor, consumer, religious, artistic and civil rights organizations, which have said that the relaxation of the media ownership rules threatened to reduce the diversity of voices on the airwaves and would lead to declining standards in television and radio programming.

The companies that have asked the commission for a broad relaxation of one or more of the ownership restrictions, and whose expansion plans could be delayed, include Viacom (parent of CBS), NBC, News Corporation (parent of the Fox Entertainment Group, Fox Television and a number of newspapers including The New York Post), the Tribune Company, the Gannett Company, the Belo Corporation and The New York Times Company.

Soon after the new rules were approved in June 2003 in a party-line vote, with Republican commissioners favoring and Democrats opposing relaxation, the agency was sued by small media companies and the broad consumer coalition on the ground that the new rules were too loose and it was sued by some broadcasters and news organizations who said the easing of the regulations did not go far enough.

Media companies have never had a chance to take advantage of the new rules. Late last summer, shortly after they were adopted, the appeals court temporarily blocked them while it considered the challenge. In its order on Thursday, the court continued to stay the rules as the commission considers its next move. It can rewrite the rules or take the case to the Supreme Court. Either approach will probably take many months.

Media ownership has also been a focus of legislative battles, as some members of Congress have tried to kill the new rules. On Tuesday, the Senate adopted a measure repealing them. An earlier effort to kill them failed after running into opposition from the White House and Republican leaders of the House of Representatives.

In the case decided on Thursday, Prometheus Radio Project v. Federal Communications Commission, the judges criticized the formula devised by the agency to measure the diversity of media markets and justify the relaxation of rules that would permit a company to own more outlets in a particular city. The case was heard by the Philadelphia appeals court because that is where it was filed by a group of small radio stations, journalist organizations and the National Council of Churches, all of which opposed the new rules.

As an example of what the court deemed was a flawed analysis of the formula used by the commission, called a diversity index, the court said the index had concluded that in New York City, the Dutchess County Community College television station was accorded the same market share as the ABC station. The Dutchess station was also given greater weight than the combined share of The New York Times and a radio station, WQXR, that it acquired before the rule banning newspaper-broadcast cross-ownership took effect in 1975. The court also criticized the commission for giving too much weight to the Internet as an alternative source of local news.